Tuesday, March 25, 2014

Plea from the edge of the abyss. Why we need the Climate Change Authority

If we were sleepwalking towards catastrophe would we know?

The UN Intergovernmental Panel on Climate Change is about to release frightening projections for the impacts of the climate change that is already unstoppable. Among the projections for the next five years is the displacement of hundreds of millions of people, a slide in crop yields and increased deaths from heatwaves.

Few dispute that it is happening. Australia’s environment department has a whole division dealing with adaption - how to cope with what we can’t stop.

Bernie Fraser heads the Climate Change Authority. The man who ruthlessly bore down on inflation just as Australia was recovering from the early 1990s recession, he knows everything about acting in the country’s long-term interests.

But few others seem to.

“I am not out to scare the pants off anybody here and I don't want to insult your intelligence with suggestions that climate change is a load of crap,” he told the National Press Club this month.

“But if policymakers accept the science and its implications, you would expect them to follow through.”

The science says any increase in global average temperatures of more than two degrees compared with pre-industrial levels is “getting into the dangerous category”. We are already halfway there, and there’s only a limited amount of carbon and equivalent gasses we can release before we get there, our so-called our “carbon budget”.

We are using it up at too fast a rate to hold the increase to two degrees. All isn’t lost, if we can pull back. The sooner we pull back gently, the less sharply we will have to pull back later.

That was the message in the Climate Change Authority’s report on targets released on March 5. Its finding was that Australia should lift its target for cutting emissions from 5 per cent below 2000 levels by 2020 to 19 per cent. Making that steeper cut now will avoid a much steeper cut later.

Much of what it suggests is easy. Adopting tougher motor vehicle emissions standards of the kind already in place elsewhere would cut running costs as well as emissions. And there will soon no longer be a local vehicle building industry to object.

Another is to simply buy extra emissions reductions from other countries. They are going cheaply at the moment, and 2020 is looming too soon to bring about all of the cuts on the Australian continent. The globe doesn’t mind where they take place. So far the Coalition has been unaccountably hostile to the idea, presenting buying cuts from overseas as a sort of moral failing. But we trade with other nations all the time and for the moment it’s the only way to do what’s needed.

It’s the reactions to the suggestions in his report that shocked Fraser.   ...

He is not surprised by the reactions of business, except by their scale and brazenness. But he is surprised by those of the government. “It is the Government's job to protect community interests,” he says. “Every politician pledges to do just that in the lead-up to every election campaign that I have heard.”

The government plans to abolish the Climate Change Authority. While not disputing the science, it shows no interest in lifting Australia's emissions reduction target. It wants to remove the carbon tax and is prepared to underfund the Emissions Reduction Fund that will replace it. It wants to axe the Clean Energy Finance Corporation and to wind back the renewable energy target.

If it believes the science - and it says it does - its thinking is unaccountably short-term, unless you consider the three-yearly electoral cycle.  If an entire nation was sleepwalking towards catastrophe it’d be politically risky to wake it up.

Could an entire nation, perhaps the entire globe, sleepwalk towards catastrophe?

Al Bartlett thought so. He was Professor Emeritus in Nuclear Physics at University of Colorado at Boulder. Before he died last year he spoke to the BBC’s More or Less radio program. <i>More or Less</i> deals with statistics, as did the interview.

Bartlett was an expert on what happens when constant growth comes up against a hard limit. A YouTube video of one of his lectures is entitled: The Most Important Video You'll Ever See.

“Steady growth means doubling over a certain period of time,” he explained to More or Less.

“Suppose you have bacteria that doubles in number every minute. Now suppose you put one of these bacterium in an empty bottle at 11.00 am and then observed that the bottle was full at midday.”

“At what time was the bottle half full?”

The surprising answer is 11.59 am - just one minute before midday, because the bacteria are doubling every minute.

“Now if you were an average bacterium in the at bottle, at what time would you first realise that you were running out of space?” he asked.

The answer mightn’t even be one minute before it was too late.

“After all, at one minute before twelve the bottle was half full, at two minutes before twelve it was only a quarter full and at five minutes before it was only 3 per cent full with 97 per cent of open space just yearning for development.

“At five minutes before twelve how many of you would realise that there was a problem?”

How many of us would realise we were sleepwalking towards catastrophe?

In The Age and Sydney Morning Herald

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Sunday, March 23, 2014

Public-private sector partnerships a mirage. The PC says so

Of all the strange things to have flowed from the corruption inquiry engulfing the former assistant treasurer, few are stranger than his use of the word ''passionate''. Arthur Sinodinos says Australian Water Holdings is a ''company whose mission I believed in and was passionate about''.

Passionate? Australian Water Holdings built pipes, tanks and pumps for Sydney Water that it could have built itself.

It's easy to imagine getting passionate about such a mission if it was the only means of getting pipes, tanks and pumps to Sydney's north-west. Or if AWH could do it more cheaply than Sydney Water itself.

Both are claimed by spruikers of public-private partnerships. In fact they are often asserted as universal truths.

Joe Hockey did so shortly after the election when he asked the Productivity Commission to inquire into ways to use the private sector more. ''The capacity of government to meet expectations for improved infrastructure services is always limited,'' he said. ''Options involving the private sector can reduce the call on government.''

The father of NSW public-private partnerships, the late 1980s and early 1990s premier Nick Greiner, made it a mantra.

Opening the privately built (and then privately run) M4 motorway, he said: ''The choice is very simple. Either have the road as a privately owned tollway or not have the road at all.''

It's complete nonsense, and a draft Productivity Commission report delivered to Hockey spells out the fallacy in excruciating detail. The private sector can't do anything the public sector can't, unless it charges. And the government itself could do that if it wanted to.

Sometimes the private sector will do things better than the public sector. The commission cites three studies that find private projects are more likely to be completed on time and near budget than government ones.

Often it'll do things worse. Borrowing is more expensive for firms such as AWH (chaired by Sinodinos) and the firm that built the M4 (whose board Greiner later joined). And the salaries are more expensive. Sinodinos was paid $200,000 for a part-time job as AWH chairman. Eddie Obeid jnr was paid $350,000. If AWH had scored the contract it was angling for, Sinodinos was set to get a bonus that would take his shareholding to about $20 million.

The fallacy is the view companies such as AWH can get access to money the government can't - what the commission calls the ''magic pudding'' fallacy.

Private sector money has to come from somewhere. Most often the private firm will siphon it out of the government, as AWH did when it billed Sydney Water for expenses including limousine rides, pornographic movies and Sinodinos' salary. Or it might borrow the money and later siphon it out of the government, meaning the government will face the same sort of costs as if it had borrowed itself.

Or it might charge tolls, which the government itself could do if it had the guts.

Either way there's nothing stopping the government borrowing more than it has for worthwhile projects. The commission thinks it can. On that point it thinks Hockey and Greiner are wrong. And probably also NSW Treasurer Mike Baird.

His plan is more subtle. It's called ''recycling''. He has sold the leases on Port Botany and Port Kembla to use the proceeds to build the first stage of WestConnex. When that's built, he will sell it and then use the proceeds to build the second stage, and so on.

As a piece of financial engineering, it's admirable. But the commission thinks it confuses two very different questions: whether something is worth building and whether it's better off privately run.

It's not happy with Baird's view of the world, but it reads as if it is much happier than it would have been with Greiner's, during whose term as premier the company that is now AWH gained the Sydney Water contract.

In The Age and Sydney Morning Herald

Tuesday, March 18, 2014

How to pay for roads

Why is it that whenever anyone asks about the funding of roads they end up getting a report that reads like 1960s' science fiction?

Kevin Rudd didn't expect it when he asked the Henry tax review to examine roads. It found that fuel tax was on the way out. New developments in technology mean increasing numbers of cars don't use fuel. Henry suggested ''telematics'', where each vehicle reported its trips to a central computer that charged its owners per kilometre driven.

Four years on Tony Abbott has been ambushed by the same suggestion. He asked the Productivity Commission to inquire into the financing of public infrastructure. He wants more of the funds to come from the private sector. Instead the commission's draft report released on Thursday found that private financing was ''not a magic pudding'' and recommended a trial of telematics. Abbott backed away quickly. Telematics was ''not something this government is considering''.

But it keeps being suggested because it's the right answer. When Abbott's ''Son-of-Henry'' tax review gets under way shortly it will probably suggest it as well. And it's far from the only confronting common sense suggestion in the draft report.

Its starting point is that we probably don't need as many new freeways and toll roads (and rail lines and desalination plants) as we think we do. It says we should first work out what we want to achieve (such as moving cars quickly) and then work out the cheapest means of achieving it. It might be congestion taxes or priority lanes for cars with three or more passengers.

It points to the national broadband network as a classic example of what not to do. Rudd developed a solution without first identifying the nature of the problem and considering whether there were cheaper ways of solving it. When none of the companies bidding to build the NBN handed in acceptable tenders Rudd decided to build a grander one with government funds at 10 times the cost. At every turn Rudd blocked attempts to compare costs and benefits.

If governments decide they should build something, ultimately the private sector won't be much help. It's not where the money comes from. In the end it can come from only four sources, according to the commission: user charges; user-specific taxes; general taxes; and (rarely) philanthropy.

Private sector funds have to come from somewhere, and to the extent that they are borrowed at high interest rates they will be more expensive than public funds.

Governments love public-private partnerships (PPPs). Victoria has 23 of them. But they are a sleight of hand.

''There is a perception that they offer a way to increase the provision of public infrastructure without drawing on a government's purse, thereby circumventing budgetary and borrowing constraints,'' the commission says.

In reality the money has to come from somewhere, either from charges or tax, but shifted in time in an effort to enable governments to keep their AAA credit ratings.

''There are benefits to maintaining a AAA credit rating,'' the commission says. ''However, there may be situations where public financing of infrastructure would be more efficient and welfare enhancing than either obtaining private financing or not providing the infrastructure.

''In these circumstances, it is in the community's interest for governments to weigh up all considerations and not just focus on credit rating concerns.''

The commission believes governments have plenty of scope to borrow more for worthwhile projects even if their credit ratings slip, and believes they probably wouldn't slip any more than if they had signed up for a PPP. Ratings agencies see through them.

And the commission has little time for the related fad of ''recycling''. Joe Hockey talks about it as a magic ingredient of this year's federal budget. Victoria's Michael O'Brien wants to do it with the Port of Melbourne. NSW is the pioneer, funding roads then selling them and funding more roads with the proceeds.

''It involves two decisions that should be considered independently,'' the commission says. ''First, whether a government-owned asset should be sold; and second, whether the government should procure new infrastructure.''

The commission has no doubt that ports and electricity generators should be sold. But it believes the arguments stand on their own. They are to do with who would best manage the assets rather than whether the proceeds should be plundered.

Asked to endorse the fashionable view that high labour costs and restrictive practices are pushing up the cost of big projects, the commission largely refuses.

''There is no single culprit,'' it says. ''Labour costs have risen steeply, particularly for (largely non-unionised) engineering design and consulting services, but so too have material input prices. For the construction industry as a whole the labour share of total costs has not changed appreciably over the past two decades.''

It's an uncommonly calm and uncommonly forward-looking assessment of the way Abbott and the states can go about building the things we need. All the more so because it's not what he expected.

In The Age and Sydney Morning Herald

Tuesday, March 11, 2014

'Repeal day'. It's easier than fixing problems

I'm going to enjoy ''repeal day''. That's on Wednesday week when the Prime Minister's parliamentary secretary introduces a blizzard of legislation and regulations aimed at sweeping away thousands of pieces of useless legislation and regulations.

Nifty, eh? It'll doubtless sweep away the laws that prevent newsagents competing with newsagents, that prevent pharmacies (and supermarkets) competing with pharmacies, and prevent taxi drivers collecting who they want.
It won't? But Josh Frydenberg, the Prime Minister's parliamentary secretary, says he wants to attack the red tape that is "cutting jobs, impeding innovation and deterring investment". Last Friday the head of the Productivity Commission nominated the red tape tying up newsagents, pharmacies and taxis as among the last shards unattacked by the wave of competition reforms set off by the Hawke government in the early 1990s.

His back-of-the-envelope calculations put the benefits of the so-called Hilmer reforms at $20 billion. He said the remaining reforms would probably be worth $5 billion.

Frydenberg will be attacking easier targets. He is set to take on weights and measures acts that he says set the standards for calibrating imperial measuring equipment during the 1960s transition to the metric system, and a war service homes regulation that set rates of interest charged in the '60s.

Repeal day is a stunt copied from the US. It would be fair to say that repealing these types of laws - and they are the only types Frydenberg mentions - will achieve nothing whatsoever when it comes to repealing red tape that matters.

"It might remove irritants, but it's actually fictitious; it's ghosts, red-tape ghosts," was the assessment of the father of the competition reforms, Professor Fred Hilmer, at the same seminar last Friday.

"I'll give you a silly example," he said referring to his own experience as vice-chancellor of the University of NSW. "Under the Audit Act, a university has to file accounts to the Parliament for every one of its subsidiaries. That would be a book centimetres thick. We don't. No one does it. And they'll repeal it. "

Removing laws that cause actual damage is harder.

Newsagents are forbidden by restrictive agreements from poaching each other's customers. The former prime minister John Howard went out on a limb to persuade the Australian Competition and Consumer Commission to back off on its plan to allow competition, declaring the restrictions "part of our way of life".

The Community Pharmacy Agreement between the government and Pharmacy Guild prevents a new pharmacy from opening up within 1.5 kilometres of an old one (unless it's in a shopping centre). When a qualified pharmacist tried to open up in the ACT suburb of Hackett in 2012, she was told she couldn't because there was already a pharmacy in Watson, 1.345 kilometres away.

Had her shop been 155 metres to the south she could have served the suburb and provided competition.

If the red tape mollycoddling existing pharmacies was removed altogether supermarkets would be able to dispense medicines at all hours of the day using qualified pharmacists. They could force down prices.

It would be in the spirit of the Hilmer reforms, but whenever a politician suggests pharmacists should face the same sort of competition as other businesses, friendly chemists hit their customers with petitions to sign while they are waiting for prescriptions.

And there's taxis. At the seminar to commemorate the 21st anniversary of the Hilmer reforms, Productivity Commission chief Peter Harris noted similarities.

Existing businesses in all three areas have been protected by red tape for so long that they are under attack in any case.

For newsagents he said the decline in circulation and the rise of social media had done "what regulatory reform could not".

Taxis face a $3.5 billion threat from Uber. That's how much Google has just paid for an app that connects passengers directly to drivers at the touch of a button.

"Three point five billion looks remarkable for a taxi booking app," Harris said.

"This suggests that there is much more scope for reform gains than just a convenient online booking service. I am not going to speculate what they might be.

"Without taking sides I merely note that Google is not the sort of entity that will go away quietly."

Even chemists are feeling "the hot breath of technology-driven competition".

"I will not comment on the position in Australia, but both Canada and the United States are experiencing the impact of online competition jumping over regulatory boundaries," he said.

"According to media reports, Canada's much cheaper regulated pricing of pharmacy products - a 200 per cent cost difference in the 10 most prescribed drugs in New York state - attracts scripts from the US to the extent that parcels are now being scrutinised by border agencies."

Tony Abbott has just commissioned the first full-scale review of competition policy since Hilmer 21 years ago. What he does in response to it will say far more about what he really thinks of red tape than will ''repeal day''. It'll show whether he hates red tape enough to take on his friends.
In The Age and Sydney Morning Herald

Tuesday, March 04, 2014

When you've nothing to say, say you're 'open for business'

What do you say when you've nothing to say? You declare you're ''open for business''. That's what South Australia did when it lost Mitsubishi in 2008. Left with 61 hectares of factory space, it advertised an''opportunity''.

Six years on, the site remains mostly empty. The government will move in departments of a university and some TAFE colleges, it has attracted some small businesses and a data centre and its website continues to proclaim: ''Right place, right time.''

Two-thirds of the workers who lost their jobs after an earlier Mitsubishi closure were employed on lower wages. One-third job-hopped from casual job to causal job. South Australia's share of the national economy slumped one-third of one per cent.

It's a picture of the future facing Victoria as Alcoa, Toyota, Ford, Holden and much of Qantas leave. This state is just as dependent on manufacturing as is South Australia. In both states it provides one job in every 10. ''How to avoid South Australia's mistakes'' might just as well have been the title of the report handed to Prime Minister Tony Abbott on Friday.

Prepared by a committee including former Victorian industry minister Mark Birrell, it is addressed to the right level of government. Most international studies show it's the economy rather than anything the locals can do that determines how factory closures pan out. John Spoehr of the Australian Workplace Innovation and Social Research Centre sums up the evidence in a paper just published by the City of Playford, which takes in the Holden plant in Adelaide. He says it is far easier for displaced workers to slot into new jobs when the economy is booming. Workers in the arc that takes in Avalon, Geelong and Point Henry might have been OK had their factories closed a decade or so back when the economy was revving up. They are less likely to be OK today.

Few new firms arise when the national economy is fairly flat. The best way to support the arc is to boost the national economy or at least not flatten it further.

If Abbott and treasurer Joe Hockey came from Victoria instead of Sydney, they might grasp the point. As much as they would like to start winding back the budget deficit, it is not the right time for the economy of Geelong and it is not the right time for the broader economies of Victoria and South Australia.

Slogans don't attract businesses. In the three months since Abbott declared Australia ''open for business'' ABS figures show planned mining investment collapsed 25 per cent and planned manufacturing investment 20 per cent. Economic conditions attract businesses, and cutbacks can make them worse.

Hockey's way out in the May budget might be to announce that many of the cuts recommended by his Commission of Audit will take place but not for some time, so as not to worsen conditions now.

Another would be to announce a number of big government-funded infrastructure programs, several of them near Geelong. It'd be a Band-Aid. Eventually those jobs would go. But it might be enough to last the arc until things pick up.

In The Age and Sydney Morning Herald